As a self-professed tax geek, it has in previous years surprised me how little tax has been discussed at Davos given the significant place it has in all economies and the fact that it is a lever governments frequently pull to try and influence behaviours, as well as a major factor in many geopolitical and international developments. But this year was different. Issues surrounding tax are starting to move up the agenda of many conversations like this, and its rising importance was clear in Davos, with several sessions directly covering tax and it coming up implicitly almost everywhere I looked.
From my view, there are three key ways in which tax contributes to this year’s theme at Davos, “Stakeholders for a cohesive and sustainable world.”
Tax policy and sustainable environments. Firstly, the issue that is most front of mind for many is in regards to climate change and environmental sustainability. The question here is how tax policy can help. Obviously green taxes are not new but are they as effective as they could be? Do they actually drive behaviours in the way intended? Do they sometimes risk creating financial dependency on the very thing we want to see disappear?
Tax and sustainable economies. This leads on to the second point. How can tax contribute to the sustainable and cohesive economies we need? At a national level issues of “fairness” as between generations and income groups are hotly debated, and as certain jobs are taken over by robots, some are asking whether a new approach to tax is needed to protect employment or redistribute the wealth created by the bots. On the international level, the distribution of taxing rights, especially between developed and developing economies is subject to debate. The hot issue at the moment is taxation of the digital economy, although the proposals currently under discussion at the Organisation for Economic Co-Operation and Development (OECD) are much broader than this. The practical impact of the OECD proposals are still being worked through. And, of course, the possible impediment taxes can create to international trade is demonstrated by the international disputes currently underway.
Sustainable tax systems. The third issue is the cohesion and sustainability of the tax system itself. At both the national and international level, tax laws are becoming more and more complex ― with multiple taxes, a web of reliefs and exemptions and additional charges and countries moving away from previously agreed standards. This is putting a significant burden on business to comply with ever increasing filing and reporting obligations, and on governments, including those in developing countries, to administer. I wonder whether there is a room for a rethink.
In this article, I will unpack each of these topics above, and reflect on how they came to life throughout my days at the 2020 World Economic Forum in Davos.
Tax and sustainable environments
The first full day in Davos was marked by the arrival of President Donald Trump, and shortly after, by Greta Thunberg walking into town to remind everyone of the urgent need to talk about climate change and the environment. And everyone was indeed talking about this ― both the social impact and, encouragingly, about new technology solutions to help. There was also some talk of the role of tax in this, which has been an under explored area to date, and I believe a more cross-disciplined approach is needed for effective and sustainable tax systems. We need environmentalists, economists, behavioural psychologists (and tax professionals) all involved.
I have heard it said that environmental and “sin” taxes, such as those applied in many countries to alcohol or tobacco products, don’t work because they legitimise the behaviours that they tax. In other words, the users think, “I have paid tax on this, so I am allowed to do it.” It seems to me that they can indeed work ― we have seen people make different choices because of the tax differential in the cost of those choices. (Here is one report from my colleagues that looks at this issue.) My concern when it comes to the environment, however, is that, without a holistic approach, tax reacts to the latest environmental concern and we end up with a “whack-a-mole” situation, shifting from one problem to another. For example, in the UK, differences in tax between petrol and diesel aimed at reducing CO2 emissions. It had the desired effect of causing people to choose diesel cars, only to find that whilst CO2 emissions might have gone down, particulate pollution increased. Similarly, taxes on landfill have coincided with an increase in the building of incinerators and fly-tipping.
My other concern about these taxes is that they have dual objectives, which aren’t always complementary to one another; these taxes seek to influence behaviour and collect tax revenues. But if the behavioural change is achieved, the tax objective is not. And environmental taxes are not an insignificant proportion of tax revenues. For example, the EU website highlights that environmental taxes in the EU amounted to €368.8 billion as of 2017 and 6.1% of government revenues from tax and social security. The modelling that we have done on other geographies shows similarly high numbers. If you add in government levies, the figure gets even higher. In every case, these revenues contribute significantly to government spending. So, we need to hope for environmental change as quickly as possible, whilst planning for the loss of tax and other revenues that currently come with it.
Tax and sustainable economies
One of the main events I attended in Davos was a discussion on the future of tax, covering digital taxes, tax competition and responsible tax behaviours. On digital taxes, some think the current OECD proposals to allocate a proportion of profits to the market jurisdiction are not enough, and that we should move to a full formulary apportionment of profits and away from arm’s length transfer pricing. Others are concerned that it might be too much for governments who are the losers in the reallocation of taxing rights to be able to sell at home. What is a very clear hope amongst the business community is that some international consensus can be reached, and that this is enough to stop the outbreak of unilateral measures, which are likely to result in double taxation, challenge certain business models and likely increase costs for small businesses using large technology platforms.
On the topic of proposals on a minimum corporate tax rate, there was again a discussion as to what the rate should be, with no agreement on a “Goldilocks” number; though in relation to tax competition, there seemed to be agreement from businesses and governments that we don’t want or need a “race to the bottom”. Harmonisation of rates might seem a possible approach, but some countries flagged the need to make rates higher. For example, when profits are made from extraction of a finite mineral resource or to introduce reliefs to incentivise investment. It seems to me that the economies of individual countries may be very different according to their geographical location, their natural resources, and their stage of development and so on. I think “BEPS 1” has probably been effective at stopping the type of tax competition between countries that involved attracting tax base without hosting business operations. So, I still think differences in tax regimes will continue but it will be important to continue to pursue some international consensus as far as possible in the interest of the global economy.
The WEF future council on trade and investment, of which I am a member, has produced a paper about the current challenges in international trade and how tax is contributing to this. The state aid cases in the EU turned tax into a trade issue and the dispute between the US and France on digital taxes versus tariffs are additional cases in point. The OECD, through the inclusive approach, is doing a good job of trying to reach consensus on some issues, but I think so-called “BEPS 2” may not be the end of the journey toward cohesion.
Sustainable tax systems
I was also able to take part in a session on Responsible Tax, transparency and the relevance of tax principles to businesses and advisors. On the subject of tax transparency, a number, but still a minority, of large groups have published detailed explanations of their tax position and some have told me that they feel they have benefited from doing so. The question is whether others will go this route. Some speculate that country by country reporting will eventually be made public, although there is wide pushback on this. A main concern here is that this reporting was designed for use by tax authorities, who have access to other data as well and only use it as a risk assessment tool, not as a substitute for the actual tax return. Some attempts to analyse country by country data in the public domain have only served to prove how misleading this information can be if it is taken out of the broader context and without an appreciation of some of the oddities in the reporting format (such as what you do with losses). So, this confusion creates concern about disclosure, and it means that if this information does become public, it is likely that companies will need to publish additional information to provide the needed context.
Despite some organizations starting to feel increased pressure to put some formal rigor around their tax principles, the publication of those tax principles by companies is still a minority activity amongst corporates and advisors. I met with Robin Hodges from The B Team at Davos, and their team has drawn up a set of tax principles, which have been adopted by a number of companies. In relation to advisors, it’s worth saying that those of us that are members of accounting professional bodies are subject to the principles in the rules of those bodies. At KPMG, we do have a set of Responsible Tax principles that we published some time ago. We have always taken the view that, in advising clients, we should not only consider what is legal (of course!) but also what is wise, and what aligns with the values of the organisation.
At the end of the day, responsible behaviour in relation to tax by all players is important, if we want to have a cohesive and sustainable tax system that works for all. Irresponsible behaviour by taxpayers results in financial and reputational risk to them and possibly wider damage to the system as a whole, as it frequently results in changes to tax law that have an impact beyond the target of the law. Irresponsible behaviour by tax authorities (which does happen; for example, by excessive use of powers or unrealistic tax assessments) breaks down trust between taxpayer and tax collector and impedes voluntary compliance. And irresponsible behaviour by commentators, such as through the misrepresentation of fact, also erodes trust that society has in the tax system itself and creates a risk to tax morale.
Throughout the days, we saw a good mix of participants from business, government the OECD and civil society, which is just what this conversation needs and, indeed, convening diverse perspectives focused on important topics like this is one of the strengths of this annual meeting.
In this modern world where it is so easy to slip into echo chambers, it’s crucial that we truly listen to others’ views. The world’s problems, including its tax issues, are very complex, and it is unlikely that any of us have all of the answers. In reaching towards a cohesive and sustainable world, one source of optimism is the speed at which technology is developing to address some of the issues. The socio-economic issues may be harder to address. But there is promise in the fact that we continue to come together.
by Jane McCormick
Areas of expertise Operating Effectiveness Pensions and Retirement Funds Tax Tax planning Tax strategiesEducation and qualifications MA St Hugh's College, OxfordAccreditation HM Inspector of TaxesProfessional Associations Forum for Tax Professionals Tax Policy Committee of the ICAEW